Charlie Munger (Trades, Portfolio): and this building, which, of course, is on a site that we cleared oldbuildings off of. You have the Tilmet Building (sp?). That was very cheap to construct. You can look around at how nicely it works. It's a very inexpensive building. It has high ceilings and good lighting et cetera.
First, we'll talk briefly about the Daily Journal business. And, of course, the Daily Journal is really two businesses. It's the traditional...Well, it's really three businesses.
First, it's the traditional information-providing newspaper for lawyers.
Second, it's the newspaper that publishes a lot of public notices that are required by law, which is where a lot of the money has been made, of course.
And third, of course, we have this relatively new software business, which is really a form of venture capital since a lot of meaningful money has not been made, and a fair amount has been lost from the two businesses that are now combined.
The traditional information business is suffering tremendous headwinds. This business made a lot a money out of lawyers' subscriptions for a long time because there was no way a lawyer could get information about the recent decisions in, say, the appellate courts in California and the federal appellate courts in California except by picking up the “Daily Appellate Report,” which we included in our newspapers.
We had something that lawyers had to have, and there was no way in the old technology for them to get it on time except through our newspaper. When the electronic stuff came, the lawyers were all trained to use electronic media to keep up with the courts.
And the new lawyers coming out could hardly do anything else but pound keys on a computer. It wasn't good for our traditional information model and our subscriptions continue to shrink year after year after year.
The public notice business, of course, is an ancient business. The old technology where the law wanted people to have some public way of getting notice and the only way to do it was with a printing press. They passed all these laws. The people who pass laws have not been quick to change from the old printed method to the modern post ink and storage basis, accessible by computer.
And that has preserved revenues from the old business, and then you had the foreclosure boom, of course. There was a torrent of revenues. I don't think there ever was a foreclosure boom -- let's call it a boom, it was a boom for us -- as big as the one we've just been through.
There's never been anything like it. And it's not over. There's still a considerable pipeline of underwater homes. Of course, it's through the press. That's the traditional business. Of course, we've made an unholy amount of money out of the public notice business, which I do not regard as a business I would bet on for the next 50 years. In other words, it's got a Sword of Damocles hanging over its head, and the traditional print business presents a very interesting problem.
Of course, practically all newspapers in America have faced the same technological revolution from changing technology, and the standard result has been an enormous impairment of the business that was a total monopoly for most proprietors of the only daily newspaper in a city or community. They own the world. An idiot could make money, and a man who's half-way competent could make an enormous amount of money.
The by-product that happened with that, and that with all this impregnable economic power, the people who controlled the newspapers, influenced by the ethos of the journalists that worked for them, by and large behaved pretty well. Whether they were Republicans or Democrats, and they got … the fourth estate. They helped run the country.
Here was a totally independent part of the governmental system in functioning actuality that served very well. That's why they call it the fourth estate. Nobody who created the Constitution had any thought of deliberately creating local monopolies. That we would have a separate branch of the government that just sort of arose through accident and had this enormous power, but that system which evolved by accident served this country very well.
The daily press with all its power is by and large civic-minded and honest all through the country, and of course, it's horribly threatened. The country is going to pay a terrible price for losing this constructive influence. … isn't like we don't have any other journalism, but I think that we are losing something.
We never used The Daily Journal, which you people own part of, as a mouthpiece for our personal political opinions. For one thing, we didn't have an impregnable monopoly. For another thing, we just didn't want... we had very intelligent readers, judges and lawyers. Half of them were in one party, and half of them were in another. I don't think either Rick or I felt at all comfortable telling somebody else what we thought on every subject as if we were God, and so we never did it.
I also think that was the best business policy. We always wanted the paper to be trusted, and I think it by and large is. I think the judges and lawyers who read it, they don't think we've got some crazy personal agenda. We're trying to tell it like it is. That's, of course, the ultimate, correct journalistic ethos.
How people cope with a technological revolution is interesting. A great number of the great collections of newspapers borrowed a lot of money to buy more papers. They like monopoly and they like to buy more of it on credit. When the technology changed, two or three or four of them got hung out to dry. That basically destroyed the entire common equity of the shareholder. That happened at a lot of places.
Even places that are super-strong like The New York Times destroyed an enormous amount of equity by paying a billion dollars for the newspaper in Boston which now makes no money at all, in fact, is probably losing.
There's been a lot of agony in the field. Around here, all we ever bought was other public notice rags. We bought every one that we could find, occasionally, one case at least, in another state. Did we ever buy anything except Arizona out of state?
Jerry Lee: We bought one in Denver.
Munger: Yes, all right, two. But we bought these public notice rags. They were slightlyincremental, and they had this embedded option in case there was ever a flood of public notices and the action was for free, so to speak. That's the way the average real estate gets rich when he does. Somewhere in his operations there's an embedded option that he really hasn't paid for, and the harvest in due time comes, and that's what happened with us. Jerry was unbelievably good at dealing with all these little proprietorship, where a man and his wife to be making $60,000 a year running a little paper. We bought a lot of them.
Lee: Plus Phoenix.
Munger: Plus Phoenix, and Phoenix was just ridiculous. I don't know how many percentper annum we made on that investment. It was thousands. I think thousands of percent per annum on the investment. I don't know how much credit we do get for doing that, but at least...You look around these other newspaper companies which have either had this horrible contraction of earnings, or they've gone completely broke. Here we are with...We're still making money out of the public notices and we've got all these marketable securities, which we bought using the proceeds of our public notice boom.
We're like the fellow who had a funeral parlor, and there was a plague.
Well, you can laugh, but that's what happened. The Texans have a marvelous saying about the people who get rich by accident and think they're geniuses. They say, “Well, old Charlie was out in the field playing the big bass tuba the day it rained gold.” That type of saying to some extent applies to us, but to some extent we were pretty true in running around and scrambling for these minor little properties, and running them intelligently and coping with the problems. I think we can fairly say that we did not anticipate a harvest like the one that came.
Of course, many of you are come here because you're investment groupies. You're not really Daily Journal shareholders.
You're addicts. You're addicts to a certain attitude toward life. It's not that large a group, but you're pretty badly addicted.
At any rate, that's the thing. Now, the software business is something else. I think you would argue correctly if you said, “You never should have bought the first one.” It looked a little bit like a pre- op showing. Spend a few million dollars and maybe we'd get a position which enabled us to have an unusual access to data that lawyers would want and so on. We had various little theories. Of course, the theories didn't work out, and we
kept getting sucked in to perfecting a software system by paying other people by the hour to make it, and we lost quite a bit of your money in our first venture.
Now, we're still losing money, we've just doubled down. We've bought another company, which is about five times our size in terms of actual revenues. But it's got a much better sales team and a much bigger installed base than we have, and we really like the people. We instantly liked and trusted the people. I don't think you'd like and trust everybody in the modern software business.
In fact somebody ran a public search recently on the name of one of the leading software titans of the world with a deep profanity attached and said, “Can you find any double hits,” and of course there were so many double hits that you couldn't believe it. So software is not a perfect business or an easy business or anything else.
You people have the declining remnants of the top tick of an old information business, the newspaper, and this pile of marketable securities, and this very interesting software play, which is like venture capital.
Most of you did not buy the Daily Journal company to get this particular outcome, but we didn't set out to create this outcome either. It just happened. Therein lies a lesson in life.
I think most lives work best when you simply react intelligently to the opportunities and difficulties you encounter, and just take the results as they fall.
Some people think that by master planning, you will solve everything, but what I find is that the master plan gets a life of its own, and people believe it because they previously decided on that then, and they make all kinds of mistakes.
(Thomas) Carlyle was a very smart man, and one of his favorite sayings was, the task of man is not to see what lies dimly in the distance but to do what lies clearly at hand.
(Ed: actual quote: “Our main business is not to see what lies dimly at a distance, but to do what clearly lies at hand.”)
It was that message from Carlyle that caused Sir William Osler to create the medical school, which became a model or revising all the medical schools of the world, which was Johns Hopkins.
He didn't have a master plan for Johns Hopkins. He just reacted to the opportunities and hazards of his time as best he could. And lo and behold, we got the leading medical school in the world.
Incidentally, that wouldn't have happened without money from Carnegie and Rockefeller. So the robber barons of old, when they set out to do charity, were some of the most effective givers in the history of philanthropy. Rockefeller's $50 million, in the course of two or three years, completely changed medicine in America.
They drove all these charlatans out that had one pill for everything from cancer to impotence, and none of it worked. They drove out a lot of people who should have been driven out, and they caused modern education and research establishments to be created.
There's interesting precedent given the strength of the Johns Hopkins system and Carlyle's basic idea, and based on that we have a certain modest prosperity in spite of being through an enormous headwind. And our basic business I think demonstrates that Carlyle might not have been wrong at all. To the extent that any of you have problems in your life, this enlightened opportunism and this resolute desire to fix problems as fast as they come up, which Jerry's a genius at.
Jerry's fixes what's wrong quickly, and he runs down opportunity quickly.
That's what we've been through with the Daily Journal, and it's interesting to us. Neither (J.P “Rick”) Guerin nor I have taken one penny out in all the years we've been invested, and you can see this is the ultimate...What would you call it? Are we misers? I don't think so. Guerin was like a prince.
I don't look too badly myself. But we're certainly willing to go through a lot of self-denial, and we really want people we scarcely know who just happened to buy this stock to do well and that isn't true at a lot of places.
They talk the talk, but they don't really walk the walk. I don't think many people who work in the executive ranks of General Motors or have served on its board of directors have any feeling of guilt that they destroyed 100 percent of the common equity, starting with the strongest company in the world.
But we're not like that. We would feel terrible loss, but we don't mind taking you through a little hell on the way. But we want you to come out all right if you keep the faith. That's the culture, and I don't think that's going to change.
Anyway, that's the Daily Journal. Jerry, do you want to say anything to this group?
Lee: No, I'm fine.
Munger: All right. Now we'll open the meeting to questions. Yeah.
Shareholder: Why double down now?
Munger: That's a very good question. You could argue if we were poorer and meaner,we wouldn't have done it, but we admire the people whose firm we've just bought. We admire the people running it. We feel it's at least a decent gamble. I have no feeling I'm just deliberately wasting money. I'm just taking a gamble I might not have taken if it was the last money I had on earth. I think that's probably what we should do. We employ a lot of people. We're located in the state, and it would be very helpful. There is some chance of it working into a bonanza. Now it may be a small chance, but there is some chance.
What is interesting about this, for legal information, those of you are students of capitalism, it was a duopoly in the legal information field, including the electronic stuff.
One was Reed-Elsevier, and the other was Thompson-Reuters. These are two very powerful places.
Reed-Elsevier got rich on one of the greatest business models ever created.
They published scientific journals. They didn't pay a dime for the content, because people want to be published. Didn't pay a dime for the reviewing and editing, because the people wanted to do the reviewing and editing as part of their duty to science.
With content totally free, they published the journal and every library had to buy them, and every leading scientist. It was just a total racket, and every year they raised the price by 15 percent. Of course, they could then buy all these other papers. You could say, “Why didn't we start in scientific publishing?” Well, the accidents of life didn't present us with that opportunity.
But what's happened there is that duopoly has suddenly gotten a new entrant, which is Bloomberg. Bloomberg is worth tens of billions of dollars and drowns in money, and has a total monopoly of its own with which it can use to do what it damn pleases to try and take territory. It can behave a lot like Amazon if it wants to, where it just takes territory from incumbents by brute force.
Now we have a three-way race, and it's interesting. You guys are professional investors. It's hard to predict which nice, comfortable two person duopolies will suddenly become a gas leak and competitive miasma. It just happens. Who would have predicted that Bloomberg would have charged into legal publishing? It has, and it's no fun for the incumbents. You do have this unpredictability in American competition, and it causes weird results.
You give me that question, but I think our chances were good enough to justify the investment, but I don't think we would have made it, if it was the last dollar we had on Earth. We're not ashamed of it. We're glad we did it. We may win. We're certainly going to try. Of course, when I say, “We're going to try,” I mean, “They're going to try.”
Munger: Any other questions?
Shareholder: Do you have any thoughts on how the legal challenges to the ratingsagencies will work out?
Munger: That's a very interesting question and very topical. Up till now, the ratingagencies have avoided any big loss from judgments. Their attitude is that they know how to sell guarantees that securities would be paid off and they weren't selling guarantees. They were selling opinions. Their attitude is, you want a guarantee, you would have to pay for it but a lot more. All we gave you is an opinion and as long as we believe their opinion and weren't deliberately lying to you, you can't recover.
That's probably a correct explanation of the law, but if you ask for a jury in their embarrassing emails and so on, this can be quite expensive. There isn't any doubt.
Both of the rating agencies have admitted to serious mistakes in judgment. Of course, those mistakes in judgment were undoubtedly contributed to by the fact that they're re-paid to do all this.
I personally don't think they were consciously lying. I'm not saying there wasn't a one person there somewhere in our organization that may not have liked his company's product, but I don't think they were consciously doing it.
They were stupid and one of the reasons they were stupid is the self- conscious selected their own interest. It's a serious bit of legal trouble. All I can tell you that I don't think anybody's ever paid any big money on this area before, but you do have embarrassing emails and so forth.
Generally speaking, the emails are great for lawyers. The record is permanent. You have an army of people. Somebody's going to say some dumb thing and you can get that dumb thing before a jury. Maybe you can make some money or browbeat somebody into a big settlement.
Which gets into the question of should young people be creating these permanent paper records on Facebook, and so on of the dumbest thing they ever did or thought, so it's immortal. I think it's insane. I would hate to have to read the dumbest things I ever said at fifteen years of age -- it would be embarrassing for all of us, at least it would be embarrassing for me.
I don't like the way the world evolved on that. I do think the rating agencies use very poor judgment. I think the people that were issuing the bonds, these are really smart people, much smarter people than the people in the rating agencies.
Of course, they paid tremendous penalties. Some of them have gone broke. Others have given them millions and millions in settlement. You'll reach impairments in reputation, so on and so on.
What happened in the boom and the lousy credit and market spiels, packaged up into lousy securities, mis-rated by mistakes by jerks who believed in mathematical formulas instead of common sense. It was not pretty. People paid a terrible price for it, and the country has paid a terrible price for it. I can't predict what's going to happen in the litigation.
I can say one thing, the rating agencies would have been way better off if they'd made less money, had been more careful, and thorough, so the extent any of us have decisions to make. Foregoing money, because it's sort of tainted, or too close to tainted, or too close to gaming, is a very good thing. Sol Price (founder of Price Club) used to say, success in business came from deciding which business you could intelligently do without.
He had a list of business he didn't want. Those things he didn't want -- he didn't want business from people who wrote bad checks. He didn't want business of people who shoplifted. He didn't want business of people who clogged-up his parking lot without buying very much. He carefully invented a system where he kept those people out, and
succeeded by deciding what he would be better off without and avoiding it. This is a very good way to think, and it's not all that common. It's, perfectly, obvious, isn't it? And it has been of enormous help to the people sitting at this head table. But most people just aren't trained to do that — if it's more business, they tend to want it.
There's enormous money and happiness, and better service to be gained, by just deciding, “I'm going to do without that.” Warren used to say, when we were brokers at Solomon, “I'm waiting for a list of the business that we have declined because it was morally beneath us even though it was legal.” People are just so competitive they just want to do every damn thing that can be done, profitably, whereas, we need something beyond that. I'd imagine, he'd behave, just slightly better, than what would take him to prison, in order to get money.
You should have personal standards that are way better than the criminal law requires. Why should the criminal law determine your behavior? It would be crazy. Who would behave that way in marriage, or in partnership, or anything else? Why should you do it in your general dealing?
I think this mess, and, of course, it's a little dispiriting to find that many of the people who are the worst miscreants don't have much sense of shame and are trying to go back as much as they can to the old behavior.
The truth of the matter is, once you've shouted into the phone, “I'll take x and y,” and three days later, you have an extra 5 million, once that has happened, the people just become hopeless addicts, and they lose their bearings. You can argue we shouldn't allow a system where that can happen.
Look at the people who get addicted to poker, both online poker and gambling parlor poker. A huge crowd of people, 50, 60 hours a week and grinding away at these tables, of course somebody who's making croupier's profit off the top, and the very shrewd people are taking away money from the less shrewd people. Is this really in the public interest? I don't think so.
Even if it were in the interest to allow this recreational poker, to turn the public securities markets into a very effective gambling house for the people who think like the poker addicts and behave like the poker addicts — if I were running the world, I would put a lot of people out of business, including several in this room. In other words, I don't think you necessarily want a huge class of people getting rich in software by being a little cleverer than other people.
Shareholder: Two questions, if you don't mind. From 2000 to 2008, Daily Journalseemed to reinvest nearly all of its profits into US Treasury notes and bills. In the last two years, after February 2009, Daily Journal has invested over $30 million into common stock of three companies. Can you discuss the difference between the investment landscape over the last few years versus 2000 to 2008?
Munger: Well, when we're engaged in something difficult, as we were with ourdeclining main business, we tended to want extra reserves of strength. As we got so much
extra money and the opportunities in marketable securities got more extreme, we changed our point of view as the facts change.
Keynes used to say, “When the facts change, do you change your opinion?” (Keynes actual quote was: "When the facts change, I change my mind. What do you do, sir?") Well, of course you do. That's what we did. Our circumstances were different and our opportunities were different, so we behaved differently. What would you do?
Shareholder: Is it any reflection of the investment climate, or purely...
Munger: Yes, of course, that was part of it. The price you pay for some of thosesecurities was ridiculously low. In fact some of that stuff was something that happens once in 40 years or something. Who in the hell keeps money sitting around waiting for one of those opportunities? (A) It might come and go and you may not recognize it, and (B) what do you do during the 40 years you're waiting?
So I don't think you should be terribly encouraged by what has happened. It doesn't indicate that suddenly a recurring stream of money going from people in their 90s. It just means that for one reason or another, we behaved pretty sensibly, and reacted pretty intelligently to opportunities. Other people didn't do it.
General Motors, out of the profits of their good years, they could have bought, every year, for many years, a big company. They could have bought Eli Lilly one year and Merck the next, and United Technologies. General Motors could own the world.
Instead, what they declared to their shareholders was a goose egg. They took the common equity to zero. And they would say it was all somebody else's fault. The climate was bad, the unions got powerful. Those damn Asians and Europeans were too competitive.
The truth of the matter is, their very prosperity made them weak. The dealerships got in the hands of inheritors, and the executives on the sales field, they go around and drink martinis with inheritors, and didn't pay enough attention to defects in their vehicles. And one thing led to another, and when they were all done the shareholders' equity went to zero.
And that was in a company that at its peak was one of the most admirable companies in the world. Take the stuff that Boss Kettering (Charles Kettering - head of research at General Motors from 1920 to 1947) had invented in the early days. Kettering was one of the most useful citizens that ever lived in America.
A self-starter on a car is a wonderful thing. Under the old system, you frequently broke your arm. You would give it a crank and it would answer back by spinning backwards and breaking your arm. I would much rather push a button than have my arm broken. Nor do I have the opportunity to go and crank in the sleet and snow.
Kettering did a lot of inventions like that. In the early days of General Motors, they really made some enormous contributions to civilization. And they are still making contributions, but it is so competitive.
I should tell you people a story, because you are groupies for stories. I talked recently to a man who shall go nameless. But his company was one of the great growth stocks of America.
And they had armies of PhDs in there who had mastered very difficult disciplines. And they had patents, and technology, and know-how, what have you -- and hard-to-replace plants. What they make is difficult to make in a lot of different categories.
And the profits in the business are very mediocre, to put it mildly. And it isn't that it has been that badly run. It's just that everybody's learned how to make these difficult things, and there are too many of them trying to make them. It just gets terrible. And what happens then is, you're now the CEO of the place and you see it's getting tough. Your duty, your acquired self-image is a guy that knows how to fix things. You never have a category in your mind of, “It's too tough to fix,” which is a really stupid idea. You can recognize all kinds of things that are too tough to fix.
But if you don't, then you are a sucker for some narrative to say, maybe there's some company in your industry that makes something really complicated that other people can't match. And you say, “Well, I'll buy that. That solves my problem.” But your friendly investment banker and your friendly management consultant want you to buy it at 30 times' earnings and 12 times' book. Of course, at that price, it won't solve your problems. And you do it anyway. After all, you've got consultants, and it gives you hope.
Many of these people buy things the way that people used to go Mexico and ingest apricot pits when they had pancreatic cancer. They wanted something that provided hope, and so they believed in apricot pits. A lot of American industry helped by their friendly investment bankers and consultants of other kinds, they want to believe that in this terrible, tough business, there's an easy solution. It just requires listening to the siren song and writing the check. Of course, usually it doesn't work.
The ordinary acquisition in corporate American does not work for the shareholder. In other words, on average all the acquisitions together are anti-shareholder. Only occasional ones work, and work well, and it is rather interesting that Berkshire, on average, they work pretty well.
What is the difference? Why are Berkshire's acquisitions, why are they averaged out so well when we pay the prices for whole companies, and the standard experience in America is that the acquisition doesn't work that well.
There are a number of reasons. Partly they're that people like buying in their own field? As to a field that is prosperous like newspapers? They keep buying up higher, and higher prices to encourage everybody wants to buy the same thing, so you get in a very bad daisy chain that is anti-shareholder.
In its places where you want to believe that there is a simple way to buy your way out of trouble. Why should it be simple to buy your way out of trouble? You get a little pancreatic cancer, are you going to buy your way out of trouble?
I don't think so. There are all kinds of things you can't buy your way out of. You have to adapt to them. Part of Berkshire's secret is that, less than most people, we don't pour endless treasure into losing hands, on the theory that we're going to win and do it fast.
Berkshire got though this helpful reputation among their group of addicts over a long period of time. It took a long time. It's a very useful, useful thing to have. Two, I think Berkshire's been blessed with these big insurance companies. It's got two things to do. It can buy companies or it can buy securities as insurance companies. Aren't you going to make better investments, if you can get two reasonable options at all times instead of one? Doesn't that make sense? That's another of the reasons.
I don't see why Berkshire isn't more copied, except I think people look at it and they look at their culture with its own traditions. They came to power at 58 they're going to be gone at 63. They don't see any way of getting from where they are to where we are.
How would you change DuPont into Berkshire Hathaway, if you were the CEO of DuPont? It's addicting. I've got right to give up on the problem and not even think about it. At any rate, I do think of it as peculiar. This acquisition business — It's generally a tough game.
Shareholder: I had a second question. The second question was you had mentioned talkabout doubling down on the New Dawn acquisition. In 2012, the company also added a supplemental addendum to management incentives, where management should be compensated should Sustain be sold or IPO. I was curious if there's anything that we should think about if Sustain were a standalone business, if it could have value to another owner that exceeds what's currently being suggested by the current financials?
Munger: Well, of course Sustain could eventually...Sustain and New Dawn, I'm a totalconvert to the new product, of course, I think if we've succeeded, that would be valuable to other people.
As it is now, it's not like ordinary software. The people like Oracle and Microsoft, and never wanted to be a mixed businesses too awful. The RFP, the consultants, the bureaucracy, it's just agony squared, agony cubed. And they like easy money, and they're right, too.
We generally chose this hair shirt, and it is agony and it is hard, but it's challenging. Eventually, if we succeed, it will do a lot of good in terms of service and efficiency and so on. We went the unusual incentive program, because everybody in software expects some carrot so we were just bending to the wind in the field, really. That explains that.
Shareholder: As a fellow addict, I wanted to comment and then a question, and that hasto be why so many people gathered to hear a 90- year-old. I'm reminded of the difference between knowledge and wisdom. We're here for wisdom. Knowledge is knowing the tomato is a fruit, but wisdom is knowing not to put it in the fruit salad.
Munger: Well, I think there's some truth in that.
Shareholder: So we hear from the liberals that have commented on had to do withparadigm shifts in management styles and is that the goals in management should be... I'd like you to apply that to the government, because I think the elephant in the room that I haven't heard that, is all of us share a concern for the leadership … and the consequences of the decisions
Munger: Well, of course, if you take the whole history of government in the world, it's apretty sad story. Think of all those years of crazy kings, crazy theocrats, the holy inquisition, populist mobs — Imagine the French mob that cut off the head of the greatest chemist in the world, Lavoisier (Antoine-Laurent de Lavoisier – the father of modern chemistry) .
If you look at the history of government in the world, you see just a lot of crazy — Think of Mao killing 20 or 30 million people on some dumb idea about farming. There's been a lot of horrible... Think of the whole Soviet Union getting so they provide perfect job security. Everybody had a job. The way they described that was, “They pretend to pay us and we pretend to work.” And despite what's been working for every else the Soviet Union (didn't want to use that.)
The whole history of the government has been bad. Of course, our founders realized there were dangers buried in democracy. It was Ben Franklin who put it in “Poor Richard's Almanac,” he says, “When citizens of the Republic learn they can vote money, the end of the Republic is nigh.”
Well, not that near, but it's a very dangerous thing that you learn you can vote yourself money. What's safe unless everybody's working their way toward productivity and success. Just ganging up to vote yourselves, money is dangerous. When it's carried to excess like Greek culture where A), everybody tried to vote themselves money instead of doing anything else or B), so they succeeded from paying taxes or anything else, you're talking about a very dysfunctional society.
It's not as dysfunctional as the Soviet Union. After all, the sheep farmer in Greece probably was pretty efficient at tending the sheep. In the Soviet Union, nothing was efficient, except the high science. Get a bunch of high IQ people together and give them problem sets -- why, you can do that as well in the gulag as you can do it somewhere else.
But short of that, why...I can't fix the problems of government. There's so much that's good, including in government, but I think it's probably a mistake to concentrate too much on what's awful but certainly a lot of intelligent people are a bit discouraged by a lot that's happened.
But you wouldn't have liked the politicians of yesteryear. They built the transcontinental railroads with Congress taking cash bribes from people like Huntington and Stanford. They got the railroad built but it wasn't pretty.
People were cheating the government way back. The Civil War was full of lousy products sold to the soldiers. I can't think of any much more heartless. Remember the local druggist who diluted all the cancer drugs so they could make more money. Imagine doing that — That was routinely done in the Civil War by respectable manufacturers. They just cheated the government troops.
There's a lot of unhappy occurrences in the history of man, and there's a lot of peculiar government...If you go back to where government was simpler and more honest, then 85 percent of the people were on farms doing backbreaking labor and they could never leave the farm or leave the farm or read anything or see any athletic events. I'd rather have a little sin and not be doing brute labor on the farm.
But at any rate, I can't solve your problem. You're right to be concerned about it. But if you also look around, you'll find example after example of fabulous good government and various institutions, both private corporations and public. I'm very much impressed with the way they run the University of Michigan. It's a tough hand at the state when there's nothing but economic squeeze for all a long time. That University has gone up, up, up, better loved, better respected, better serving. If you look around, you'll find much that's good in human governments, as well as bad.
Shareholder: what is the company doing today different from yesterday and that couldbe reflected in the picking of the right software?
Munger: We bought New Dawn, which has a way better sales culture than we have anda bigger installed base and we like the people. That is very different.
Shareholder: Is that proprietary?
Charlie: Well, meaning is it a cinch that we will win? The answer is no. Is it quitepossible that we will win? The answer is yes. But it's quite different. Yeah?
Shareholder: If you're design a proxy statement and you're trying to think about acouple simple long term metrics to incentivize management. What would you think about?
Munger: Well, if you want to talk about that subject, which is really interesting fromyour point of view... you have touched a real nerve. What has happened, of course, is that institutional money management has been hooked with the aid of these consultants, whom I can't stand.
So everybody wants to raise the indexes and they've got 50 different indexes, but everybody's racing an index. The monthly statement shows how you performed that month in relation to the index. Your shareholders who'll make the decision as to whether or not to buy the stock are institutional money managers and they're worried about not losing assets and fees that are related to the assets from getting behind the other people?
That is a dysfunctional, stupid system and it gets stronger and stronger with every passing day. That is a serious problem.
I don't think little changes in governance are going to fix something so awful. These people are locked in this horrible system, all the participants, and they can't do much about it. They have to live there. They've got a wife and children and a mortgage, but they have to live in the system they're in.
It's not a pretty system. The people who are profiting from it like it the way it is. It does cause extra action in terms of brokers' commissions, and so on and so on, and more fees and more different kinds of investment vehicles.
It's the same thing like the apricot pits for the cancer sufferer, or the guy who acquire his way to wealth, having failed in his basic business. If it doesn't work, there's a new investment vehicle, a new technique. There's a bunch of Pied Pipers who are always selling some new thing that everybody can try.
It's a crazy, dysfunctional system. In a better world, we wouldn't have all those incentives to make money on a short-term basis. To have everybody engaged in trying to out-think everybody else about what's going to be bought next or be fashionable next, is a very dysfunctional system.
I don't think you are going to have great improvements in governance by tinkering with the rules about proxies, when the whole damned system is fundamentally flawed, when people have these perverse motives.
I look at the votes on these. Everybody votes with ISS (all these institutions) and they've got formulas, and what they are is pro-takeover. If you're a money manager, and you get four takeovers in a year out of your portfolios, that may be the difference between fired and not being fired.
So, the institutions like takeovers, but I'm not sure we want everything in America taken over by Carl Icahn (Trades, Portfolio).
Would that be a great outcome for the country? I don't think so.
I think the whole subject of proper governance is a really important subject, but I would argue that the compensation system is crazy, the institutional money-management system is crazy, and the rewards system is quite unfair in many cases. People are voting themselves money they're not entitled to.
It's not a good system, and I don't think there's any easy fix. Well, there is an easy fix, but it's not one that would be easy to get through by vote.
Read Part 2 of the 2013 meeting notes here.
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